Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Thursday, June 30, 2011

In my new fair, simple, and consistent Tax Code I would replace the IRA, ESA, HSA, and MSA with one USA – “Universal Savings Account”.

I would also replace all of the various retirement savings options for self-employed taxpayers (i.e. Keogh, SIMPLE. SEP, etc) with one SERSA – “Self-Employed Retirement Savings Account”.

All taxpayers could contribute up to the lesser of $10,000 or total earned income to a Universal Savings Account. This $10,000 maximum would be indexed for inflation.

There would be a “traditional” USA and a ROTH USA. There would be no restrictions on the ability to contribute to either option. A taxpayer, regardless of his/her level or income or current coverage under an employer plan, could elect to contribute to a “traditional” USA and claim a tax deduction, elect to contribute to a ROTH USA with no current deduction but all withdrawals after age 59½ being totally tax-free (subject to the same current 5-year rule), or elect to split the maximum allowable deduction between the two options.

There would no income tax or premature withdrawal penalty on withdrawals of any amount at any time from a “traditional” USA that are used to pay for qualified post-secondary education (including room and board) or medical expenses (including health insurance premiums). There would be income tax on “unspecified” withdrawals, with a 10% penalty for “unspecified” withdrawals made prior to reaching age 59½, except for death or disability.

In the case where there is a “tax basis” in a traditional USA (resulting from non-deductible contributions to IRAs made prior to the effective date of the new Code) withdrawals would be considered to come from “tax basis” first. If a taxpayer had a “tax basis” of $10,000 in a traditional USA and withdrew $15,000, only $5,000 would be subject to income tax, unless used for qualified education or medical costs. If the taxpayer withdrew $6,000 there may be a 10% premature penalty assessment, depending on the taxpayer’s age and what was done with the money, but there would be no income tax. Withdrawals for qualified education and medical costs would not reduce “tax basis”.

There would be no income tax, or penalties, on any withdrawals of any amount at any time from a ROTH USA to pay for qualified post-secondary education (including room and board) or medical expenses (including health insurance premiums). All other rules that currently exist for ROTH IRA withdrawals would apply to ROTH USA withdrawals.

A self-employed taxpayer could contribute up to the lesser of the current maximum contribution, including “catch-up”, allowed for a 401(k) or 403(b) account or “net earnings from self-employment” to a “Self-Employed Retirement Savings Account”. Employees of the self-employed business could also elect to contribute up to the maximum to their own RSA (established like a current IRA) as part of the business’s SERSA plan, with their contribution reducing taxable federal wages on the W-2.

There would be a “traditional” SERSA and a ROTH SERSA, and all self-employed taxpayers, and their employees, could split their deduction between the two options in any way they so choose regardless of income.

A SERSA plan would have to be established before the end of the calendar year, so that any employees could be notified of its availability and could chose to contribute via payroll deduction. But the owner’s contribution could be determined and deposited up to the due date of the return, including extensions. The owner would not, under any circumstances, be required to make any contribution for himself/herself.

Contributions to a traditional USA or SERSA (by the owner) would continue to be deducted "above-the-line" as an Adjustment to Income.

I admit that the above concepts are not original to me. They do mirror some proposals actually suggested by Dubya during his tenure. Hey, everything that George W did or proposed during his Presidency was not bad, although the list of his good actions and ideas is truly small.

Wednesday, June 29, 2011

* Only last week I consulted with Bruce, the MISSOURI TAX GUY, on issues involving an LLC electing to be taxed as a corporation and further electing sub-Chapter S status – and what do I find in my online “wanderings” but a post by Bruce answering the question “Can an LLC Be Taxed as an S Corp?”!

“Scott Adams, the man who's made a fortune by making fun of the stupidity that abounds in much of corporate life, wants to use that concept in our real world.

Specifically, he's suggesting a stupidity tax.”

This is a great idea! I would certainly support taxing idiots like Donald Trump and those who appear on reality tv (if Snookie, the slut from THE JERSEY SHORE, was upset about the tanning tax, she will be livid about this).

However I expect it would never be passed by Congress. We all know that the members of Congress are, for the most part, idiots and probably would pass a tax on themselves.

FYI, Scott Adams writes the comic strip DILBERT.

* Trish McIntire has transferred her blog series on starting and operating a small business from OUR TAXING TIMES to her new MOM AND POP’S blog, introducing the move with “Biz Background Series”.

“Its nickname may be the Garden State, but New Jersey is no Eden for retirees. The Tax Foundation says New Jersey's combined state and local tax burden is the highest in the nation, thanks in part to sky-high property taxes.”

I did not see Pennsylvania, where I plan to retire to, on the list. PA does not tax pensions.

“The credit was a terrible idea for many reasons, not least because it added massive complexity to a process that already frustrated most people. Is it any wonder why people are so unhappy with their government?”

Credits like this, and especially this credit, do not belong in the Tax Code!

Have you been reading my continuing blog series on how I would re-write the Tax Code? I haven’t received any comments on any of my ideas lately.

“Social Security retirement benefits are an important part of most people's retirement income. There are many rules regarding when you can collect benefits which will affect your retirement income. Whether you are a career person or a homemaker, it's important that you understand the Social Security eligibility rules so you can maximize your Social Security income.”

* While anything preceded by FOX is not the best source for “fair and balanced” information on any topic, George Saenz answers an oft-asked “Dear Tax Talk” question on “Deducting Taxes on Unimproved Land” correctly at FOX BUSINESS.COM.

Tuesday, June 28, 2011

Currently a taxpayer can deduct on Schedule A either state and local income taxes, including employee contributions to state unemployment, disability and family leave funds, or state and local sales taxes, real estate taxes on all property held, personal property taxes, foreign taxes, mortgage interest, including points, on acquisition debt and home equity debt on two personal residences, mortgage insurance premiums, and investment interest.

There has been talk of doing away with the deductions for real estate taxes, state income taxes, and mortgage interest. My new Tax Code would allow an itemized deduction for state and local income taxes, real estate taxes paid on the taxpayer’s primary personal residence only, and mortgage interest on acquisition debt only for the primary personal residence only.

So taxpayers who itemize would be able to deduct state and local income taxes paid, including state fund withholdings, and the real estate taxes and acquisition debt interest on the home in which they live.

There would be no current deduction for real estate taxes on any other real estate held by the taxpayer. Real estate taxes on vacation homes would be considered a personal expense and non-deductible. Real estate taxes on rental property would continue to be deductible as currently allowed on Schedule E. Real estate taxes on property held for investment, such as vacant lots or houses purchased to be “flipped”, would be capitalized and added to the cost basis in determining gain or loss. There would be no deduction for personal property taxes. Foreign tax paid would be allowed as a credit only, direct from a Form 1099 or K-1 and without the need for a Form 1116, regardless of the amount of the foreign tax paid.

Only interest on “acquisition debt” – money borrowed to buy, build or substantially improve a taxpayer’s primary personal residence, and secured by the residence - would be deductible. There would be no deduction for mortgage interest on a second personal residence or for interest on home equity debt not used to substantially improve one’s primary personal residence.

Interest on home equity borrowing would be allowed on Schedule C, E or F if the money borrowed was used for business or rental purposes, using the current “follow the money” tracking rules.

This would require special new rules and regulations for banks and mortgage companies for issuing home-secured loans.

A “mortgage” loan would only be permitted for “acquisition debt”. Interest on a “mortgage” for a taxpayer’s primary personal residence would be fully deductible, up to the current acquisition debt limitations. “Home equity debt” would have to be a totally separate loan, and interest on this type of loan would not be deductible. A Form 1098 would only be issued for interest paid on a “mortgage” loan, and the bank or mortgage company would be required to report only interest paid on up to $1 Million of principal, and indicate if the mortgage was secured by a primary personal residence.

One would not be able to refinance a home-secured loan to include both types of debt in one loan. Therefore a homeowner could not refinance a “mortgage” to get additional money in hand unless he/she could prove to the lender that the money is used to “substantially improve” the secured residence. One would have to refinance the “mortgage” for the exact same principal, adding perhaps related closing costs, and take out a separate “home equity” loan to get any money in hand.

By instituting these requirements a taxpayer, or his/her preparer, would truly be able to just take the amount of mortgage interest reported on the Form 1098 for the primary personal residence and transfer it to Schedule A.

Points on acquisition debt for a taxpayer’s primary principal residence would be deductible as mortgage interest – but would have to be “amortized” over the life of the mortgage in all situations. Points paid on the purchase of vacation or investment property would be capitalized and added to cost basis in determining gain or loss when sold.

Why would I allow these deductions in the new simple and fair Tax Code?

The Internal Revenue Code taxes Americans based on income measured in pure dollars. However it is a fact that the “value” of one’s level of income differs, sometimes greatly, based on one’s geographical location. A family living in the northeast (New York, certainly New Jersey, Connecticut) or California that has an income of $150,000 may be just getting by, while a similar family that resides in “middle America” lives like royalty on $150,000. Many components of the Tax Code are indexed for inflation, but nothing is indexed for geography. To be honest I have no idea how one would even begin to index for geography.

It costs an awful lot to live in, for example, New York, certainly New Jersey, Connecticut, and California. State and local income and property taxes are the highest in the country. The cost of real estate is also excessively high. As a result one must earn a lot more money to be able to live in these states – and salaries are arbitrarily increased to reflect the increased cost of living. Yet $150,000 in income is taxed by the federal government at the same rate in New York City as it is in Hope, Arkansas.

Taxes and the cost of a home, and therefore also the amount of “acquisition debt” mortgage interest paid on a residence, are higher in the Northeast, and California. Since we pay taxes on “net income” after deductions, allowing an itemized deduction for these items would help to somewhat geographically “equalize” the tax burden.

No deduction would be allowed for mortgage insurance premiums in any circumstances. This deduction should never have been allowed in the first place.

As of this writing I think I would keep the itemized deduction for investment interest as it is under current law, and continue to limit it to net investment income. Home equity interest could be deductible as investment interest under current tracking rules.

Monday, June 27, 2011

Last week my posts in the re-writing the Tax Code series talked about what I would put in the new simple, fair, and consistent federal Tax Code. Today I would like to list some of the current and recent Tax Code provisions that will not be included.

First and foremost – the new Tax Code would not have any kind of “Alternative Minimum Tax”. There would be only one method of determining income tax liability. The dreaded AMT would be dead and buried – for good.

That is not to say that all of these items would no longer be deductible. Educator expenses, Business Expenses of Reservists, and Moving Expenses would be deductible under the category of Employee Business Expenses. The deduction for health and long-term care insurance premiums for self-employed taxpayers would be claimed directly on Schedule C or F.

Now taking these benefits out of the Tax Code does not necessarily mean that the government will no longer provide benefits to encourage higher education, energy-efficient purchases, and to encourage individuals “on the tit” to work. As I have been saying for years, such government benefits should be administered as direct “point of purchase” payments or discounts paid out by the appropriate cabinet agency.

· When you buy a qualifying energy-efficient water heater or hybrid car you would get a “cash-for-clunkers-like” discount directly from the seller, who would be reimbursed directly by the government.

· Additional government grants would be given through the existing Student Financial Aid system, directly reducing tuition payments, again with the institution being reimbursed by the government.

· Incentives to work could be built in to the Aid to Families With Dependent Children program – such as a government reimbursement for certain payroll tax withholdings.

· If the government wants to give those with student loans a break it should just reduce the amount of interest on the loans, providing subsidy payments directly to banks.

In an earlier post in the series I mentioned that, as of this writing I have not decided if the new Code will have a special increased dependent exemption amount or a Dependent Credit. Whichever option I chose will replace the current Child Tax Credit.

There will be itemized deductions that also will not “make the cut”, but I will discuss these items in future posts.

Reading her introduction to the subject it is easy to understand why a small business person needs to have a competent tax professional.

* Speaking of Trish McIntire, she has started a new blog – MOM AND POP’S (a Micro Business Blog).

“What I didn't find as I tried to talk myself out of doing this blog was a lot of focus on the very small businesses. The trendy term is "micro" business. But most of us think of them as Mom & Pops, the small local shops and services in our neighborhoods. I found blogs on marketing and venture capital, several that were run by companies with something to sell to small businesses and a lot of general theory. But nothing providing tips and info to the micro business owners. That is my goal with this blog. To be a resource.”

“Estate taxes are generally levied for two reasons: To break up concentrations of dynastic wealth and to raise significant tax revenues. The seminal 1987 NBER paper by B. Douglas Bernheim, Does the Estate Tax Raise Revenue?, suggests that the estate tax accomplishes neither of these goals.”

However, I also agree with Joe on this important point -

“To the extent the estate tax does any good, it's does so through the basis-step up at death -- solving the need to dig through ancient or lost records to determine tax basis.”

I do not, under any circumstances, want to lose the step-up of basis for inherited property.

“More disaster victims in Oklahoma, Illinois, Massachusetts and Vermont qualify for tax relief. Victims of recent severe storms and flooding in numerous states have more time to make tax payments and file returns if they are living or operating a business in counties that have been designated as federal disaster areas. Some additional time-sensitive acts are also postponed. A full listing of the most recent announcements is provided on the IRS website.”

When will states realize that adding tax on tax to resident individuals and businesses is not the answer. With highly taxed, and highly politically corrupt, states like Illinois and New Jersey the answer to balancing the budget is to cut wasteful pork and political entitlements.

Friday, June 24, 2011

When unemployment benefits first became taxable I remember turning to my mentor and saying, “Next thing you know they will be taxing Social Security”. I was right!

Social Security and Railroad Retirement Benefits were first taxable up to a maximum of 50% of the benefits paid, based on income. The 50% figure was chosen because one-half of the total Social Security contribution is made by the taxpayer and 50% by the employer. This was eventually increased to a maximum of 85% of benefits paid, taking into account the “accrued earnings” on the contributions.

Currently the taxable portion of Social Security and Railroad Retirement benefits is determined using a complicated formula based on taxable and tax-exempt income and filing status. Under this formula it is possible that each additional $1.00 in income could be taxed as $1.85, and 85 cents of each additional $1.00 of tax-exempt municipal interest would be effectively taxed.

And under the current rules, although we say that capital gains and qualified dividends are taxed at a special 0% or 15% tax rate, these items of income can increase the amount of taxable Social Security and Railroad Retirement benefits, so that the effective tax rate is in reality more than 0% and 15%.

In my new Tax Code I would calculate the taxable portion of Social Security and Railroad benefits in the same manner as any other pension or annuity.

I would use the Simplified General Method to allocate the recovery of employee “after tax” contributions to the Social Security system (employee Social Security tax, but not Medicare tax, withholdings) to each monthly check over a period of time based on the age of the recipient when payments began.

If it was determined that the annual recovery of employee Social Security contributions for a retiree was $3,000, and the total Social Security benefits received for the year was $18,000, then $15,000 would be taxed income, regardless of the amount of the taxpayer’s other taxable and tax-exempt income.

The Social Security Administration has a record of employee contributions and can accurately identify the taxable portion on the Form 1099-SSA, as also can be done with the information return for Railroad Retirement benefits. There would no longer be the need for taxpayers to complete a complicated worksheet to determine the taxable amount.

Determining the taxable portion of Social Security benefits for individuals who had paid “self-employment tax” over the years may be a bit more complicated. The taxable portion of benefits paid to minor children will also be more complicated to determine. But I expect the SSA software can be adjusted to determine the amount to report in these situations.

Thursday, June 23, 2011

The IRS has announced that the Standard Mileage Allowance is going up by 4.5 cents per mile effective for miles driven from July 1 through December 31.

The Standard Mileage Allowance for business use of your car will be 51 cents per mile for mileage driven from January 1st through June 30th, and 55.5 cents per mile for mileage from July 1st through December 31st.

The Standard Mileage Allowance for Medical and Moving travel is 19 cents per mile for January 1st through June 30th, and increases to 23.5 cents per mile for July 1st through December 31st.

The Standard Mileage Allowance for Charitable driving remains at 14 cents per mile. This rate is determined by the idiots in Congress, and has not been increased in a dog’s age.

That means that my 1040 clients will have to keep track of medical and business miles separately for January through June and for July through December. This mid-year increase happened once before, for calendar year 2008.

Actually a few of my clients still give me mileage broken down by Jan-June and July-December. Some clients have the memory of an elephant, asking if I can still use Income Averaging. Sewer “taxes” were deductible as real estate tax for one year only way back in the late 70s or early 80s (it is so long ago that I forget when), and every year one or two clients will still include their sewer bills with their tax “stuff”.

The good news is that I will be getting increased expense checks each month beginning in July.

As usual the IRS is behind the market, as someone just commented to me today that gas prices should begin to drop any day now.

I first discussed this in 2007, and have been touting it ever since as a tax reform proposal.

The new Tax Code, as I would write it, will do away with the deduction for depreciation of real estate, including capital improvements to real estate.

According to the IRS, depreciation is “an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property”. The IRS discusses depreciation in detail in Publication 946 - How To Depreciate Property.

Let’s look at depreciation from the point of view of the Income Statement. Basically, if you purchase an asset (i.e. equipment, a vehicle, or real estate) that will last more than one year you spread the cost of the asset over its “useful life”. You purchase a new computer. You certainly do not purchase a new computer each year – you expect that it will continue to provide service for several years. So you divide the cost of the computer over a period of years to reflect this fact, and to properly report the “economic reality” of the purchase.

If you deducted the full cost of the computer in the year of purchase this would distort the true cost of doing business. Since you generally purchase a new computer every five years, claiming a deduction of 1/5 of the cost each year “more better” represents your cost of operations.

Thus depreciation is used to “recover the cost or other basis of certain property”.

Another way to look at depreciation is from the Balance Sheet perspective. When you purchase an asset that asset has value to you. You trade the asset of cash for a computer. If you sold your business the value of the computer would be included in the value of the business. As an asset ages its value drops. A two-year old computer does not have the same value in the market as a comparable brand new computer. Depreciation is used to reflect the drop in value of the asset.

Thus depreciation is used to reflect the “wear and tear, deterioration, or obsolescence of the property.”

If we look at economic reality, a building has a life of much more than the 27.5 or 39 years over which depreciation is currently allowed. The building I lived in before moving to my current apartment was 100 year old and is still going strong. And, for the most part, the value of real estate does not drop in value over the years. If properly maintained its value will generally increase. My parents purchased their first home for $13,000 and sold it many, many years later for $75,000 (and they were robbed).

Granted real estate values can go down, as we have seen a lot of in the last few years, due to market conditions. But this is the exception and not the rule.

For all intents and purposes, and for the most part, real estate does not “depreciate”. You do not replace a building every few years because it no longer provides the same service or function. And the value of real estate as a component of the value of a business does not drop as it ages. So why should we allow a tax deduction for the depreciation of real estate?

The new Tax Code would not permit a deduction for the depreciation of real property or capital improvements thereto on any income tax return – not on Schedule C, Schedule E, Schedule F, Form 1041, Form 1065, Form 1120, or Form 1120-S.

By doing away with the depreciation of real property a taxpayer would no longer have to “recapture” depreciation when the property is sold, which would greatly simplify the process.

Along the same lines, so as not to distort the economic reality of the situation, I would also do away with Section 179 expensing of personal depreciable property on any income tax return.

A big problem with the way Social Security benefits are taxed. For every additional $1.00 in income earned by a retiree they could be taxed on $1.50 or $1.85.

If you are following my re-writing the Tax Code series I will be discussing how my newly written Tax Code would tax Social Security benefits – very different from the current policy.

* Another great quote from Professor Jim Maule’s (of MAULED AGAIN) ongoing battle to simplify the Tax Code. It seems I am not alone in the fight.

“A simpler income tax also can be a more transparent tax. The fewer gimmicks, loopholes, special provisions, and other warps in the system, the less likely that two people in the same situation end up paying different amounts of federal income tax. Complexity provides a shadow in which too much tax avoidance can hide.”

Russ makes the following excellent points concerning the “pennies on the dollar” claim of ads like those once run by Ms Deutch –

“As for the firms that still advertise and promise you that they’ll stop the IRS, and you will qualify to pay “pennies on the dollar,” remember that:

· Only about 15% of Offers in Compromise successfully make it through the IRS;· It typically takes over one year for an OIC to make it through the IRS;· Most individuals will not qualify for an OIC; and· If you look at the fine print of the commercials, you will see, “Case not typical. Your results may vary.”

“Egged on by {Mark} Kirk at a hearing this month, {Dick} Durbin, chairman of the Senate Appropriations subcommittee that oversees the Internal Revenue Service, wants a disinterested IRS to look into drawing up software like TurboTax and offering it free to Americans on the agency's website.”

While this would be ok by me, I would prefer that a taxpayer, or tax preparer, could go to a page on the IRS website and directly enter 1040 information and submit a calculated return, without having to download software, using the NJWebFile system as a guide.

Tuesday, June 21, 2011

I am running out of other non-current 1040 “stuff” to do to avoid the GD extensions! I am almost caught up on IRS and state tax correspondence and amended returns.

It appears to me that, like in old movies, cartoons and sitcoms, I have a tiny “mini-me” on each shoulder, whispering in my ears.

One mini-me has wings and tells me that I must “buckle down” and complete the GD extensions, saying that my clients have been very patient and have waited long enough for me to get off my arse.

The other has horns and tells me that there is always “manana” (tomorrow). There is no hurry to get the GDEs done.

I must allow the winged mini-me to win this argument. I truly must “buckle down”, no matter how much I do not want to be doing any more 1040s at this time, and “get ‘er done!”. My clients have indeed been patient, and have waited long enough. For the most part these returns were not received at the last minute, and the excessive delay is truly my fault. My sincere apologies to these patient clients.

So now that I am caught up on all other “stuff” (except for the two corporate returns will have to wait until July) there is no more excuses for not devoting my full attention to completing the GD extensions. I must force myself to get in gear by locking myself away for the rest of June, even if it means checking into a cheap motel to avoid distractions (as I used to do many, many years ago when I got backed up).

I have “scheduled” posts in my re-write the Tax Code series for the next several days – so while I may be locked away you will still be able to get your TWTP “fix”.

To be sure I am ahead of last year, GDE-wise. And next year I will not have this problem – as I will be thinning the herd and making other changes to my 1040 practice – so there will be no GDEs (other than a few fed-files) in the “to be done” box on May 1, 2012!

FYI - I do NOT read what I assume to be "are we there yet" emails from clients until I am actually "there".

As the Flach Tax Reform Commission, consisting of Robert D Flach, meets to rewrite the US Tax Code we begin with “everything is taxable and nothing is deductible”. In this series of posts I will talk about what items of income I would exclude from taxation and what deductions, and credits (if any), I would allow in our new fair, simple, and consistent Tax Code – the “excepts” – as well as filing status and tax brackets rules.

I will not necessarily be working my way down the Pages of the 1040 in order – dealing with items of income before deductions. I will be skipping all over the place. But when the series is completed I will organize the posts in proper order in a published report.

As I said in the initial post of the series - Your comments on my recommendations are welcomed and encouraged. I especially want to hear from fellow tax professionals.

OK – let’s begin. Just coincidentally we begin with the topic of Filing Status.

Currently there are 5 choices for a return’s filing status, each with its own rules and regulations –

The new Code would create neither a “marriage tax penalty” nor, for the most part, a “marriage tax benefit”.

The Married Filing Separately status would permit a married couple, whether living together or not, to file as if they were filing two individual returns as Single. All of the exclusions from income, deductions and credits that are available to a Single filer would be available to the Married Filing Separate status. The Tax Rate Schedule (and Tax Table) for Married Filing Separately would be exactly the same as that for Single. As per current law this status would be elective, and two-earning families will be able to file a joint return if they so choose.

I would create a special 2-columned 1040 and 1040A form that would allow both spouses to file separately on one return. Married taxpayers would still have the option of filing separately on two separately filed returns.

The Married Filing Joint status would provide for double of everything available to the Single status. For example, if, as under current law, a Single filer can deduct up to $3,000 in net capital losses per year, a married couple filing jointly would be able to deduct up to $6,000. The standard deduction for Married Filing Joint would be twice that for Single, as it currently is under the extended “Bush” tax cuts. It would be as if the separate incomes and deductions allowed on the new 2-column 1040 for separate filers were combined in one column.

The Married Filing Joint status would provide a marriage tax benefit for most couples with only one working spouse, but I would support a benefit for couples where one spouse is a “stay-at-home” parent.

The tax benefits currently provided by the Head of Household and Qualifying Widow(er) status would be replaced by an increased either dependent personal exemption or dependent tax credit (I have not yet decided which) that would combine the current personal exemption for dependents and the Child Tax Credit. If a dependent exemption is used it would be much greater than the personal exemption allowed for taxpayer and spouse. If a dependent credit is allowed then there would be no personal exemptions for dependents.

I like the idea of having only one Tax Rate Schedule (and Tax Table) for all taxpayers, regardless of filing status. In the case of Married Filing Joint perhaps the net taxable income would be divided by two, the tax determined from either table or rate schedule on this half of the combined income, and then multiply that tax amount by two. This method assumes that income earned by and deductions allowed for the couple combined apply equally to each spouse if they had filed separately.

John and Jane Q Taxpayer file a joint return. The net taxable income on the return is $100,000. The tax is taken from the tables is based on $50,000 of income. If the tax on $50,000 is $5,000, then the tax liability on the joint return is $10,000 (the 10% tax rate on this level of income is used only as an example for simplicity).

Monday, June 20, 2011

Here it is – 2011 is almost half over and the idiots in Congress have taken absolutely no action on tax reform. They have not even begun a serious, or any kind of, discussion of the issue.

This was a big topic toward the end of last year, with several studies, government and private, recommending a re-writing of the mucking fess that is our current federal Tax Code, and calls for reform by both Parties, both houses of Congress, and the Administration.

I doubt that anyone disagrees that the Tax Code should be reformed, and I expect that most agree that it should be rewritten. However, 2011 is the year that this must be done – and nobody with any power is doing anything.

2012 is an election year. It is a known fact that the main goal, and primary motivation, of every elected official, at the local, state and federal level, is to be re-elected. The elected official’s secondary goal and motivation is to legislate pork for its constituents and supporters, which is really an off-shoot of goal #1. #3 on their list is to unwaveringly support and quote verbatim, without independent thought, whatever script is written for them by their Party. The proper administration of the government, which should be their primary purpose, is at most fourth on the list, if it is even on the politician’s list at all.

There is no way that any kind of substantive legislation on tax reform, or anything else, will be passed in an election year. No one wants to be in the position of having an opponent say “Congressman X is bad – he just voted to take away your deduction for home equity interest”.

The “Bush” tax cuts, that expired on December 31, 2010, and were extended at the very last minute for two years (no surprise - the idiots in Congress took the obvious easy way out rather than doing any thinking), will again expire on December 31, 2012. If nothing is done in 2011, the idiots in Congress will most likely again take the easy and cowardly way out by extending them for another two years, with the possible exception of perhaps bringing back the higher top brackets for high-earners.

Like Frankenstein, the current Tax Code must be destroyed. And re-written from scratch.

When describing how our income tax system works I usually say that “everything is table, except . . . and nothing is deductible, except . . .” The re-writing process must begin with “everything is taxable” and “nothing is deductible” and carefully examine all the current, and possible, “except”s (aka “tax expenditures”) to see which should be added.

In rewriting the Tax Code we must keep in mind that its purpose is to raise money to fund the government. It must not be used to redistribute wealth. While it may be used, sparingly, to reward or discourage certain financial behavior, it must not be once again made an easy back-door entry for social benefit legislation.

Our new Tax Code must be fair, simple, and consistent. There must be no phase-out levels or other income limitations. No “read my lips” back-door taxes. If a deduction is good for one it is good for all. There must be no “alternative” tax system – just one basic tax system that applies to all taxpayers. If we are to index items in the Code for inflation, than all items in the Code should be indexed for inflation. Definitions of terms must be uniform in all possible situations.

This post will serve to launch an ongoing series on what I personally believe should be the “excepts” in the new fair and simple Tax Code. I will talk about what and how income should be taxed and what deductions and credits (if any) should be allowed. Your comments on my recommendations are welcomed and encouraged. I especially want to hear from fellow tax professionals.

If the idiots in Congress are too lazy to keep the discussion of tax reform alive then I will attempt to do so.

Saturday, June 18, 2011

* I learned from a post by Joe Kristan at the ROTH AND COMPANY TAX UPDATE BLOG that Dan Meyer was back blogging about taxes and accounting at TICK MARKS – which has nothing to do with lyme disease (gee, I haven’t said that in a long time). Welcome back Dan!

“If the deduction is improper, you don't get a permanent private exception for it just because the IRS missed it before.”

* And speaking of the test, I agree with Trish McIntire of OUR TAXING TIMES that the survey for tax preparers from Prometric, the company that will be writing and administering the competency test, is a “Stupid Survey” (see my comment).

* Trish continues her ongoing comprehensive series of posts on tax issues for taxpayers considering starting a business, taking time out now and then for commentary on happenings relating to the tax preparation industry (like the post referenced above).

A good “must read” entry in the series is “Payroll Money”, in which she warns about what could be a very expensive problem for the new business owner – trust-fund mismanagement.

Maybe not. Most of us are suffering from information overload. Many of us have to make a conscious effort to unplug, relax, and avoid the Three Ps (pundits, politicians, and partisan rhetoric). All of us have better things to do, when push comes to shove.

For me, however, now is the time to take the plunge and launch Tax Didactic. If you have stumbled across my blog, I hope you learn something new or take a look at something old from a new perspective.”

Welcome, Knox, and thanks for including TWTP in your blogroll.

As an aside - one benefit from the title Wandering Tax Pro is that it is often last when in an alphabetical list. As many a vaudevillian would have told you – if you can’t get top billing being last is the next best thing.

Friday, June 17, 2011

Despite what the title of the remake of the James Bond film “Thunderball” suggests, when it comes to income tax returns sometimes it is OK to say “never”.

(1) NEVER file a fraudulent return.

As the former British Chancellor of the Exchequer Denis Healey said - “The difference between tax evasion and tax avoidance is the thickness of a prison wall”.

Tax avoidance is the lawful and ethical use of accepted procedures to reduce your tax liability. Tax evasion is a willful misrepresentation or concealment of information. Despite growing public acceptance of cheating on tax returns, reckless tax evasion is a very dangerous matter. There are many legal ways to reduce your tax liability – too many to risk your future with tax fraud.

Normally the IRS has 3 years to audit a tax return. If fraud can be proven the Service can go back and audit every return you have ever filed.

(2) NEVER pay a person to prepare your tax return who has not registered with the IRS and received a Preparer Tax Identification Number (PTIN).

And never use a preparer who will not sign the finished returns (if he/she refuses to sign you refuse to pay), or who charges a fee based on the amount of your refund.

(3) NEVER ignore a notice or correspondence from the Internal Revenue Service or a state tax agency.

If you receive a notice in the mail give it to your tax preparer immediately. If you prepared your own return and do not understand the notice consult a tax professional.

(4) NEVER assume that a notice or billing you receive from the Internal Revenue Service or a state tax agency is correct.

Do not automatically pay the balance due on a notice from the IRS or the state. More often than not the notice is wrong. To repeat - If you receive a notice in the mail give it to your tax preparer immediately. If you prepared your own return and do not understand the notice consult a tax professional.

(5) NEVER hold up filing your return, or an automatic extension request, by the April statutory deadline simply because you do not have the money to pay the tax you owe.

It is vitally important that you file your 1040 or 1040A, or 4868 extension application, by the April 15th deadline, even if you cannot pay all or any of the tax due on the return. Along the same lines, if you have requested an extension be sure to get your tax return in the mail by October 15th, again even if you cannot pay all or any of the tax due. The penalty for paying late is .5% (1/2 of 1%) of the tax due per month. The penalty for filing late is a full 5% of the tax due per month – 10 times more!

(6) NEVER have your tax returns prepared by one of the “fast food” preparation chains.

You will pay gourmet restaurant prices for fast food service and he pressured to purchase unnecessary additional products and services (actually the “products” and service at McDonald’s or Burger King are superior to those of these tax preparation chains).

(7) NEVER assume that just because a person has the initials CPA after his/her name that he/she knows his/her arse from a hole in the ground when it comes to preparing 1040s.

The only initials that have any bearing on 1040 competence and currency is “EA” – for Enrolled Agent (an EA is not an employee or representative of the IRS). And, when the regulation regime is finally phased in, “RTRP” – for Registered Tax Return Preparer.

There are many CPAs out there who are indeed competent and current in 1040 taxation, but unfortunately the IRS, allegedly due to some statutory prohibition, will not allow them to identify their skills by also being granted the initials RTRP. CPAs are exempt from the testing and continuing education requirements under the tax preparer regulation regime, and therefore will not be granted the status of RTRP.

(8) And perhaps the most important – NEVER accept tax advice from anyone other than a professional tax preparer.

Don’t listen to a broker, a banker, an insurance salesman, your neighbor, or your Uncle Charlie!

I am sure for the most part those who give you free tax advice are doing so out of a genuine desire to help you, and sincerely think they know what they are talking about. But most of the time they don’t.

Wednesday, June 15, 2011

* FORBES.COM’s newest tax blogger, TAX GIRL Kelly Phllips Erb, brings back her popular “Fix The Tax Code Friday” series in her new home.

Last Friday’s question –

“Like many U.S. corporations, would you be willing to give up your tax breaks – including deductions, exemptions and credits – for a lower tax rate? And if so, how long would the rate have to be?”

* Kelly also began “a series on the history and evolution of popular tax deductions”, which “will continue throughout the month of June”. The series, apparently titled “Deduct This”, kicked off with “Deduct This: The History of Student Loan Interest”.

Bruce correctly points out that the classification of workers has state as well as federal considerations.

His bottom line –

“There are ways to reduce the risk of an investigation or challenge by a state or federal authority. At a minimum, you should:

· Familiarize yourself with the rules. Ignorance of the rules is not a legitimate defense. Knowledge of the rules will allow you to structure and carefully manage your relationships with your workers to minimize risk.

· Document relationships with your workers and vendors. Although it won’t always save you, it helps to have a written contract stating the terms of employment.”

And Bruce suggests that if you have a question about how to classify a worker you should ask your tax professional (or call Bruce).

* Professor Annette Nellen provides a good comprehensive update on the status of the tax return preparer regulation regime, with a look at current developments, in “PTIN- The Continuing Sequels” at her Tax Insider column at CPA2BIZ.

Annette reports that “the preparer exams will not be ready until at least October 2011” and that those who have currently registered for a PTIN “have until the end of 2013 to pass the test”. I will certainly not be the first on my block to sign up for the test, since I have until 2013 to so do. I will wait until after the first sets of tests have been given and “graded” and then take advantage of the NATP exam preparation class (it is currently being offered – but there is no actual test on which to base the preparation). I expect I will not be sitting for the actual exam until the end of 2012 or the beginning (January) of 2013.

Prometric, the exam administrator, is in the process of conducting a survey of tax professionals, and I have taken the survey.

This would be similar to the current 2% reduction in the employee share of Social Security tax, which is BO’s most recent alternative to mailing out stimulus checks. The thought is that reducing the tax cost of an employee will cause employers to run out and hire tons of new employees.

If this is the goal I don’t know how effective it will be. Will saving a few thousand dollars in taxes per employee cause a business to spend tens of thousands per employee (actual salary, employee benefits, state payroll taxes, administrative costs) to hire new people? I am certainly not against reducing the tax burden of small business – but I would not hold my breath for an immediate and significant increase in hiring.

In theory electronic submission of returns is a good thing and saves the IRS money. However if the IRS wants me to e-file returns that I prepare (I only “file” one 1040 – my own; I do not file client returns, I prepare them and the client files the return) they will need to allow me to file directly with the IRS free of charge via its website, like NJWebFile.

I use NJWebFile as often as possible, if the client allows - but it has had many, many problems in the past. Not all NJ returns can be e-filed this way. For two non-consecutive filing years the coupon issued by the system for payment of a balance due had the wrong year encoded and payments were applied to the previous year. This created an overpayment for a tax year, about which the State of NJ did not notify taxpayers (hoping that it would be able to keep the money to waste on pork), and taxpayers were billed by the State in the fall for the payments they had previously and timely made.

I refuse to waste thousands of dollars each year on flawed tax preparation software, currently necessary to submit federal income tax returns electronically.

* Dr Jean Murray reminds us “Got a Booth at a Farmer’s Market? Don’t Forget to Pay Taxes” at ABOUT.COM: US BUSILESS LAW/TAXES. “Seasonal businesses like booths at flea markets, farmers markets, and craft fairs must also pay taxes. Although each locality and state has different regulations, if you have a business where you sell to customers, you probably are going to have to pay taxes.”

As Jean points out, you will probably need to pay federal and state income tax, self-employment tax, sales tax, and perhaps employment (payroll) tax.

I bet the IRS, and states, would make a fortune if they sent undercover agents to local flea markets.

Although just because you take a table at a flea market doesn’t mean you will be subject to tax. If you do so to sell your used “stuff’, rather than holding a yard or garage sale, you certainly are not in business to make a profit – as the “cost of goods sold” would greatly exceed the sale price. But if you sell items that you make or grow at a mark-up you are in business.

“The IRS has received $897 million worth of adoption tax credits were claimed on year 2010 tax returns as of April 28th, 2011. Over half of the adoption credit tax return had missing or insufficient supporting documentation. The IRS is routing such tax returns to auditors, who request additional documentation and review documentation to make sure the tax credit being claimed is genuine. However, the IRS has no specific time frame for completing its review of tax returns.”

Just one more reason why the payment of such government benefits should be done directly by the appropriate federal agency and NOT through the Tax Code.

* On this topic Professor James Maule truly tells it like it is in “More Criticism of Non-Tax Tax Credits” at MAULED AGAIN, joining me in my call for “leaving social welfare spending out of the Internal Revenue Code and sparing the IRS the task of doing other agencies’ work”.

Jim explains why the idiots in Congress continue to load the Tax Code with items that do not belong. While Congresscritters (as Joe Kristan likes to call them) may be idiots, they are not necessarily stupid (the highlights are mine) -

“So why does Congress continue to put non-tax programs into the tax law? Olson pointed out one of the factors. A spending program administered by an agency other than the IRS is “scored against the budget,” that is, it is characterized as spending. On the other hand, by hiding the spending as a tax reduction in the form of a tax credit or tax deduction, the Congress makes no less of an increase in the federal budget deficit but can claim that it has not increased spending. Until people understand that a $100 tax credit issued to ten million taxpayers is no different, for federal budget purposes, than the writing of ten million $100 checks, the nation’s attempt to get its fiscal house in order is doomed. Worse, by distracting the IRS with additional program responsibilities without increasing its funding, Congress forces the IRS to divert resources from its primary mission, namely, protecting the revenue.

Members of Congress have figured out that if they enact legislation granting $3 billion to a pet project, they risk taking heat for bestowing taxpayer dollars on a special interest. They have also learned that if they jam a tax credit into the Internal Revenue Code that reduces the tax liability of the taxpayers operating that pet project, not only is the give-away not treated as federal spending, it is also much more likely that no one will notice. But a few of us do, and my hope and goal is to cause most of us to notice. Perhaps then the betrayal will be sufficiently visible to bring about the electoral upheaval that betrayal should bring.”

“Over the last few years, there has been a surge in the percentage of taxpayers who e-file their tax returns. Last year, a total of 71% of American taxpayers used the e-filing system to submit their tax returns. At the same time, there has also been a massive increase in the number of identity thefts in relation to taxes. The number of tax-related identity theft incidents has increased fivefold, from about 50,000 in 2008 to nearly 250,000 in 2010, out of about 140 million returns.”

Darrin tells us that IRS Commissioner Shulman says this is merely a coincidence. The Government Accountability Office (GAO) somewhat agrees, but its Director Jim White has “said that it would be worthwhile for the IRS to learn more about the number of identity thieves who e-file fraudulent returns or who request that refunds be paid out to debit cards rather than in paper checks or direct deposits to checking accounts as this could help the IRS to increase their rate of fraud detection”.

I have been filing only paper federal income tax returns for 40 tax seasons and have never come across an incidence of 1040-related identity fraud.

* I learned about a study by the Mercatus Center from a post by Joe Kristan at the ROTH AND COMPANY TAX UPDATE BLOG. The study "comprehensively ranks the American states on their public policies that affect individual freedoms in the economic, social, and personal spheres”.

Joe told us that his home state of Iowa was #13 on the list. It is no surprise that New Jersey is at the bottom of the barrel again - #49 overall, $#47 for economic freedom, and #45 for personal freedom.

As we all know by now -

“New Jersey is a highly regulated state all around, near the bottom in both personal and economic freedom, and it deteriorated further in 2007–2008. Taxes are high, and spending is about average. Spending on education is particularly high. Property taxes are among the highest in the country.”

The study also stated the following about the “Garden State”, which I do not think is bad -

Monday, June 13, 2011

Before leaving for my brief rest in Sullivan County NY I received the following letter that was sent to a client by the Internal Revenue Service -

“Dear Taxpayer:

We are unable to process your claim for the tax period(s) shown above.

We received and reviewed your Injured Spouse Allocation, Form 8379. Injured Spouse Allocation is meant for an overpayment that offsets to a federal or tax debt that is owed by only one spouse. Since you received your return was not a joint return, you do not qualify for injured spouse relief.”

Below is my reply to the Internal Revenue Service -

“Dear Sir or Madame:

We have received and reviewed your LTR 916C for the above referenced taxpayer and return, a photocopy of which is attached.

In my 40 tax seasons preparing 1040s this is the strangest correspondence I have ever received from the Internal Revenue Service, or any other tax agency, and I have received some strange ones over the years.

The letter indicates that the taxpayer filed an ‘Injured Spouse Allocation’. The taxpayer filed a Form 1040A for 2010 as ‘Single’. The only attachment was a Schedule M for the Making Work Pay credit. Prior to her wedding last month the taxpayer has never been married and has never filed a joint income tax return.

The taxpayer obviously did not file a Form 8379 (Injured Spouse Allocation) for 2010 or any other year. I have absolutely no clue as to where you got the idea the taxpayer filed a Form 8379 for relief as an injured spouse. Perhaps the person inputting the information on a Form 8379 at an IRS processing center entered the wrong Social Security number, transposing a number.

Please correct your records to reflect that the taxpayer referenced above did not file a claim for injured spouse relief. The taxpayer has been married for less than a month – not enough time to have been financially injured.

If you have any questions, or need any additional information, you can email me at rdftaxpro@yahoo.com.

Thank you for your cooperation.

Sincerely yours,

Robert D Flach”

Besides the basic absurdity of the letter – I thought all IRS correspondence was now in simple and proper English.

Sunday, June 12, 2011

I have returned from a brief, but wonderfully 1040-Free, 4 days in Sullivan County NY, staying in Narrowsburg NY. Despite the brutal heat (as the audience left the theatre after Wednesday’s matinee performance the Producer was announcing that it was 97 degrees) I managed to survive – and finished reading my first Stuart Woods Will Lee mystery and my second and third of James Patterson’s Women’s Murder Club books.

The reason for the timing of my trip (while it had also hopefully been to celebrate my finished the GD extensions – but that was true wishful thinking) was to see a musical comedy titled IDAHO in a new venue for me – the Forestburgh Playhouse in Forestburgh NY.

After having been somewhat disappointed with the relative amateur nature of the OUR GANG theatre company in Ocean County (minutes from LBI) I was truly pleased and delighted with my introduction to the Forestburgh Playhouse.

I actually do not remember how I first came across the existence of the Playhouse – it was probably last fall while visiting the area in a tourist guide or some similar publication. It has apparently been around for some 50 years – although under various names over the years. I “Googled” it earlier in the year and checked out its current season.

In addition to old standards MAN OF LA MANCHA and CHICAGO, which I had seen several times before (on Broadway and in regional theatre), was the new musical IDAHO. Here is how it was described –

“A bawdy, original, laugh-out-loud musical comedy that pays homage to Broadway’s Golden Age classics! Tater country is turned spud-side-up in IDAHO! When a mail order bride comes to town and falls in love with the wrong man. Born (out of wedlock) from the golden age of musical comedy comes a new love story . . . a twisted tale of wife stealin’, spud peeling’ and double dealin’ at a time when men were men and Aunt Pearlie carried the shotgun.”

The theatre looked like it had once been a barn. There was only one level – no mezzanine or balcony. And, again a pleasant surprise, it is apparently an equity house. Because it was, based on the directions, in the middle of the back country of NY I chose the Wednesday matinee so as to be traveling each way in daylight. While, at 57, I may not have been the youngest member of the audience, the number of those younger than me could be counted on one hand.

The show turned out to be an excessively, although not offensively, bawdy (a difficult balance to maintain – and proven by the fact that it appeared none of the senior citizen audience walked out) send up of OKLAHOMA, complete with a rousing production number in which the cast spells out the name of the state.

It starts out with “Heck It’s A Helluva Day”. The handsome lead sings about his “Tater Wagon” (without fringe). There is a dream ballet. The cast includes a girl who can’t say no (she once “dated” a soldier named Charley Company) who sings “The Boys Are Never Put Out . . . Because I Do”. While everything may have been up to date in Kansas City, this musical tells us “Boise’s Just As Noisy As Kin Be”. The villain of the piece is not Jud, but Jed. And, borrowing from another R+H classic, the matriarchal Aunt leads the cast in singing an inspirational (You’ll Never Walk Alone – like) “Screw Up Your Courage” (“Don’t be a pansy and piss in your pants – screw up your courage!). And during the Tater Festival the Aunt even started to sing about the fact that the potato grower and the cattleman should be friends, but the song was interrupted and never finished.

The show was great, an as-promised laugh-out-loud (which I did) musical comedy. I was surprised to learn that it had been an entry in last year’s New York Musical Theatre Festival, productions of which I attend each year. How could I have missed it? Definitely two thumbs up from me.

While I will not be returning to the Forestburgh Playhouse again this year, I look forward to the announcement of next year’s schedule.

Friday, June 10, 2011

{ While I enjoy the last day of my Totally 1040-Free trip here is another contribution-themed rerun - RDF }

Q. Just wondering -- if we buy candy, 50/50 raffles, etc. from co-workers/friends/family for the benefit of schools or scouts, are we allowed to deduct the expenses on our tax return? (Sometimes, each order amounts to $40 or so.) If yes, should we pay by check each time?

A. When giving me a list of charitable contributions for the year many clients will include the cost of raffle tickets, including 50-50s, purchased for the benefit of a church or school. Regardless of who is selling them (i.e. church or charity) 50-50 raffle tickets, or any kind of raffle tickets, are not charitable contributions - they are gambling. To repeat - raffle tickets are not deductible as contributions.

If you are reporting taxable gambling winnings on Line 21 of your Form 1040 - from whatever source (i.e. casinos, racetrack, lottery, raffle, etc) - the cost of raffle tickets are deductible as a gambling expense (to the extent of the winnings reported) as a miscellaneous deduction (deductible in full – not subject to 2% of AGI exclusion) if (and only if) you itemize on Schedule A.

The only possible instance in which you could claim a charitable deduction for a raffle ticket is if you purchased a ticket and then donated the ticket itself back to the charity so they could sell it again. In such a situation you would not have any chance of winning the item(s) being raffled.

For the most part the purchase of candy, cookies, etc from a church or charity (most common example being Girl Scout Cookies) is not deductible as a charitable contribution. You are not making a contribution - you are buying something of value for a fair market price..The only exception would be if, for example, the normal market value of a box of cookies is $3.00 and the charity is selling them for $10.00. In this case $7.00 would possibly be deductible. But in most cases the cookies and candy are being sold for pretty much what you would pay in the store - so no tax deduction.

Thursday, June 9, 2011

{ Before we leave the topic of contributions here is a rerun” of a related post from a few years back. In light of the Tax Court decision that inspired the topic – I would recommend that the family providing the services discussed in this post get a letter from The Seeing Eye charity outlining and acknowledging the contribution – RDF }

An email from a former co-worker (who I recently ran into coincidentally after not seeing each other for about 20 years) brought up an interesting tax issue.Here is the pertinent portion of the email –

“My wife is raising a puppy for The Seeing Eye in Morristown, NJ. The puppy is delivered at about 6 weeks and stays with the host family until the puppy reaches 12-15 months of age, at which time it is returned to The Seeing Eye for the appropriate training to become a Guide Dog. The host family is responsible for introducing the dog to the public - independently along with group excursions. Fees paid to a veterinarian are reimbursed by the Seeing Eye. However, dog food, toys and travel are not reimbursed in full. Someone in the club was wondering if these unreimbursed expenditures could be claimed as a charitable deduction. My gut feeling was that since these expenditures are made through a grocery or pet store it would be difficult to substantiate these expenditures for inclusion on the Form 1040 Schedule A. The travel, however, to attend meetings and outings may be something that could be utilized on the Form 1040 Schedule A.”

“Although you cannot deduct the value of your services given to a qualified organization, you may be able to deduct some amounts you pay in giving services to a qualified organization. The amounts must be:

• Unreimbursed,• Directly connected with the services,• Expenses you had only because of the services you gave, and• Not personal, living, or family expenses.”

A: Yes. Guide Dogs for the Blind is a nonprofit charitable organization, and all expenses incurred by the raiser as they relate to raising the puppy (dog food, veterinary bills, gas mileage, etc.) are considered a donation to Guide Dogs. Guide Dogs suggests all puppy raisers consult with a tax advisor to receive the proper IRS requirements for documentation.”

I tend to agree with the advice provided by Guide Dogs for the Blind.

The Seeing Eye in Morristown, NJ is a qualified charity. The purpose of the organization is to raise and train Seeing Eye dogs for use by a blind person. The dog is placed in the volunteer taxpayer’s home by The Seeing Eye as a puppy to be raised. The volunteer taxpayer begins the dog’s training by “introducing the dog to the public - independently along with group excursions”. When the dog is old enough to begin actual guide dog training it is returned to the organization.

The email indicates that the expenses incurred by the family, other than veterinarian bills, are “not reimbursed in full”. According to the organization’s website, it “provides a stipend to help defray the cost of food”, but this does not cover the total cost of the food. And no reimbursement is given for travel costs.

The website says – “Your Area Coordinator will give you an initial eight-pound bag of puppy food. We suggest you purchase the same brand in 40-pound bags at local feed stores.” So The Seeing Eye tells the volunteer taxpayer what type of food it should buy.

There is an actual “out of pocket” for food as well as for dog toys and travel to the vet and “to attend meetings and outings”.

Let’s apply the guidelines in the IRS pub.

1. A portion of the expenses are unreimbursed. There is a true “out of pocket”. Only the "out of pocket" portion is deductible.

2. The expenses are directly connected with the service of raising the puppy provided by the volunteer taxpayer.

3. The expenses are incurred only because of the service of raising the puppy provided by the volunteer taxpayer. And

4. These are not “personal, living, or family expenses”. The volunteer taxpayer is not taking in the dog to be the family pet – but as a true volunteer service to the organization. The taxpayer is required to begin the puppy’s socialization training and to return the dog when it is old enough for more specialized training.

As for substantiation – a travel diary (notes made in a regular pocket date book) would document the miles driven to meetings and organization sponsored outings. The deduction in this case would be 14 cents per mile (the standard mileage allowance for charity). The fact that the cost of the dog food and toys are on bills from pet stores and groceries should not matter. One would just circle the applicable items and make a note on the individual receipts and save them in a separate envelope. At the end of the year the amounts would be added up and the stipend received would be deducted to determine the amount of the tax deduction.

If the puppy placed by The Seeing Eye is the only dog in the household substantiating the cost of food, etc. is easy. If there is one or more other family dogs in the picture one would have to allocate the food purchases among the dogs, unless a special brand or type of food is purchased for the future guide dog that is different from the food purchased for the family dog(s). In the case of multiple dogs the cost of “toys” may be questionable, unless the volunteer taxpayer is told by The Seeing Eye what specific toys or other aides are to be purchased to assist in the puppy’s specialized socialization training.

Of course, as the email suggest, these volunteer expenses are only deductible if you can itemize on Schedule A.

FYI, according to the IRS publication on Medical and Dental Expenses (Pub 502) –“You can include in medical expenses the costs of buying, training, and maintaining a guide dog or other service animal to assist a visually-impaired or hearing-impaired person, or a person with other physical disabilities.”

So when the guide dog is placed with a blind person, that person can deduct in full, as a medical expense (subject to the 7 1/2% of AGI exclusion) all the costs associated with the dog (i.e food, vet bills, etc).

The guidelines used to determine if the dog-raising expenses of my friend and his wife are deductible can be applied to other types of volunteer work.

For example, if you are a regular “docent” at a museum, or if you are a Board or committee member of a charity, or if you drive members of your church’s youth organization to group events you can deduct your round trip mileage to the museum, to attend meetings, and to the events. And if you are a scoutmaster you can deduct the cost to purchase and clean your uniform. IRS Pub 526 discusses such deductible expenses in more detail.

I agree with Annette that we tax pros should support efforts at tax reform. I have said time and again that a simpler tax system will not adversely affect my business. If I did nothing but 1040As all day during the tax season I would make more money, reduce my costs and the potential for error and audit, experience substantially less agita, and greatly reduce the number of extensions. And, of course, there will always be some version of Schedules C, E and F to prepare. I also believe that my clients will not decide to do their own returns if the tax system is simplified; they will continue to come to me.

Annette’s guest post reminds me that I promised to write one for Peter as well – which I will do once I have finished with the GD extensions.

“Colorado Governor John Hickenlooper signed a bill authorizing a tax amnesty in Colorado. The amnesty period will be from October 1st to November 15th. It applies to any tax debt owed as of December 31, 2010.”

“Fringe benefits are sometimes thought of as perks. Perks or benefits are generally taxable unless they’re otherwise excluded. As of January 1, 2009, the exclusion from taxable income applies to qualified bicycle commuting reimbursement.”

“It will take Canadians two days longer this year to be free of federal and provincial tax burdens and to start working for themselves, the Fraser Institute said.

Annual Tax Freedom Day falls on June 6 this year, the day Finance Minister Jim Flaherty will retable the federal budget in Parliament.

Tax Freedom Day is a measure to show the impact of taxes on Canadian families. If Canadians had to pay all taxes up front they would have to hand over every penny they earned to the government up to that date.”

The TAX FOUNDATION had previously reported that TAX FREEDOM DAY in the US was April 12, 2011.

Before contacting me with questions about how a blog post relates to your specific situation, please be aware that I do not give free tax advice to non-clients by e-mail, comment response, or phone. So don't waste your time and mine.